Despite knowing about front running, Franklin Templeton didn’t stop Kudva, says Shriram Subramanian, a corporate governance expert

The founder and MD of InGovern Research Services says SEBI order has no bearing on the fund manager’s freedom and return maximization. However, fraud and unethical behaviour in the pursuit of return maximization cannot happen.

June 11, 2021 / 10:52 PM IST

In its June 7 order, SEBI stated that Franklin Templeton mutual fund mismanaged its debt funds. It ordered the fund house to pay back investors, through the six wound-up schemes, the investment management fees it had earned since the year 2018. Additionally, it also found its Asia Pacific Distribution head, Vivek Kudva and his family guilty of withdrawing their own funds from the schemes just days before the winding up. In a conversation with Moneycontrol’s Nikhil Walavalkar, Shriram Subramanian, Founder and Managing Director, InGovern Research Services, a proxy advisory firm, says that Vivek Kudva’s and his family’s conduct was wrong.

Franklin Templeton (FT) has been asked to return fund management fees it had earned in the past three odd years. Is there such a precedent anywhere globally? 

It is a common global practice for the regulator to impose monetary fines and disgorgement of amounts gained by the regulatory breach or misconduct or fraud. Also, the penalty or fine is usually so high, as to act as a deterrent for other market participants to indulge in such misconduct or fraud.

The Head of FT’s Asia Pacific region, Vivek Kudva, and his family members have been penalized. How do you assess this decision?

The order has very detailed data on the dates of when Vivek Kudva and his family members redeemed all units in one go within a few days of getting the information that six debt funds are facing liquidity issues. There had been no transaction from April 1, 2019 till March 19, 2020.


Front-running is a very widely known concept in the investment world and all executives are regularly sensitized in the form of courses to regulatory compliance. It is surprising that FT’S internal compliance did not raise a red flag or stop the redemption by Mr Kudva and his family. This also points to a process deficiency within FT. Propriety demanded that executives with material non-published information be wary of transacting large amounts.

What’s the right way forward? How do you strike a balance between genuine withdrawal and inappropriate behavior?

Genuine withdrawal would have meant a periodic need-based withdrawal while not in possession of material information.

Franklin Templeton has contested many of SEBI’s regulations saying that it has not been specific in its previous circulars and regulations. SEBI, on the other hand, appears to have focused on the spirit of the regulations and how they ought to have been interpreted. Is it necessary for the regulator to go for a rule-based approach instead of a spirit-based approach?

SEBI has relied on a comprehensive forensic audit and has looked into all aspects of the six funds. It is well-known that SEBI has been moving from a rule-based approach to a principle-based approach. We have some way to go for us to have a completely principle-based regulatory landscape.

How will the SEBI order restore balance between fund manager freedom and return maximisation?  There is a delicate line.

The SEBI order has no bearing on the fund manager’s freedom and return maximization. Return and risk are inherent in financial markets and that is well-understood by the regulator and market participants. What happened in March 2020 due to the pandemic was an extreme constraint on liquidity, which fund houses could not be prepared for. However, fraud and unethical behaviour in the pursuit of return maximization cannot happen.

Do you think that the SEBI’s FT order will discourage fund houses from taking credit risks?

On the contrary, the SEBI FT order will force fund houses to take prudent credit risks that are in the interest of all investors. Fund management companies would enhance their risk management practices and tighten internal and external compliance.

Separately, through a recent circular, it is proposed to pay salaries in the form of mutual fund units. What impact could it have on fund managers? 

Compensation structure within the MF industry will definitely undergo a change. It may also mean a short-term increase in employee costs for AMCs. Just like with hedge funds, fund managers will probably be more careful in taking unwarranted risks, as part of their wealth is also tied to fund performance.
Nikhil Walavalkar
first published: Jun 9, 2021 09:43 am

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